Good morning, everyone, and thanks for joining. I'm Stephen Forbes, Guggenheim's Hardline's Analyst, We have the pleasure of hosting Dave Denton, Executive Vice President and Chief Financial Officer of Loews today for a 30 minute fireside chat. Dave joined Lowe's at a pivotal moment back in 2018. And if I remember it correctly, Dave, it was weeks before the December Analyst Day. And we've been working through the strategic roadmap at an accelerated pace ever since.
So really an exciting timeframe for the company and I'm sure an exciting journey for yourself. So really thank you for being here and looking forward for our chat today.
Yes. Well, Steve, one thanks for hosting us. We appreciate you doing that. And importantly to the investors, just thank you for the interest in the company. It has been Really unique time in the evolution of the company.
I feel like we're very nicely positioned as we think about the future and Certainly, look forward to getting into some of those topics, Steve, as we go through this morning.
So maybe with that, Dave, I was hoping to spend the first couple of minutes here, Maybe outside of the Lowe specific story and talking about the home improvement industry as a whole at a high level. So maybe a 2 part question to kick it off is, first, when you think about the macroeconomic factors that exists, right, and sort of that underpin the planning for the business. Which ones do you think will be most impactful to the overall industry in the post COVID environment? And then second, are there any industry specific tailwinds or headwinds that you are most focused on as you plan out the next phase of growth for Lowe's?
Yes, interesting. Listen, I think the sector is really Poised for continued expansion for the next several years. I think despite the fact that the sector has expanded pretty dramatically over the last 18 months to 24 months, I think we've actually just moved we moved the demand cycle up and we're now going to grow off a kind of a new elevated demand curve into the future. And I think some of this just the traditional drivers of home improvement continue to be really strong. There's Home price appreciation continues to be a bit elevated.
We have an aging housing stock here in the West. The demand for new homes continue or elevate or I guess an upgrade of your existing home continues to be strong and I think because the supply is pretty anemic at this point in time, people are pivoting into if I can't upgrade my to a new home, I'm actually going to renovate my existing home and expand it to meet the needs. And I think COVID has also accelerated that demand curve as well because a couple of things are happening. People are spending more time in their homes, so and maintenance is increasing. At the same time, people are using the home very differently today.
They're working from home, they're many times exercising from home, they're doing school from home. So I think just all of that, it just becomes such a unique and needed asset that the spend in this category, we believe strongly are going to continue for the next several periods. And I think the thing that we do watch a bit is really twofold. 1 is, what's the economic health of the consumer? How is that evolving and quite honestly, it's actually improved, not declined, it's actually in a really good spot, but we watch that.
And then secondly, we do watch discretionary spending and where those discretionary dollars happen to move around categories. And so we watch that. I think we've been quite bullish on the fact that discretionary spending into the home continues to be pretty strong.
And maybe on that point, sort of this outlook at a high level for discretionary spend for next year, any sort of updated thoughts or can you remind us Any comments that have been made about the stimulus impact and just the potential importance of fiscal policy as we think about the next leg here?
Yes, it's interesting. Stimulus did have a positive effect on our business, but a relatively modest positive effect. If you look at Q1, you look at the stimulus that was layered into it, It might have impacted us by 200 to 300 basis points from a top line perspective. So helpful, but not the leading driver of demand in our cycle. So I think obviously we'll cycle against some of that, but I think the underlying demand will still remain all that despite maybe a lack of stimulus from the federal government as we go into the back half of this year and importantly into 'twenty two.
That's interesting, right. And it's sort of a perfect segue into the second topic here, an important one given the time period now is just guidance methodologies. It's always a topic I like sort of discussing at a high level. So obviously nothing specific. But maybe can you remind us how Lowe's historically has established a sort of base comp forecast?
How many sort of inputs there are to it, whether 2020 in the COVID period in general has impacted that internal model and where you guys are just in sort of the optimization of trying to improve visibility into the future?
Yes. Really good question, Stephen. We obviously start with the demand forecast from a market perspective and we do Some of our own economic analysis there, but importantly, we draw upon other economists and other forecasters in the marketplace and get a consensus on how we think the market is going to perform. Then in turn, we layer on our initiatives in efforts of where we want to pivot and grow our business, both from a geographic perspective, but importantly from a merchandise perspective. And I would say it was interesting a little bit around this very, I guess, uncertain period of time in the world.
We've actually probably increased the depth of our forecast and our planning and we've probably been More detailed around it, both from a category perspective and from a geography perspective, because what we want to do is we want to be very thoughtful and planned for around how we're thinking about the market and our business. At the same time, if variations start to happen in the market, we want to see them and respond to them quickly. So we've actually pushed down a more detailed economic forecast and the financial forecast for that very reason, because it does allow us to understand when trends start to maybe move in a different direction so we can respond very rapidly to those evolving trends.
And on that evolving trend point, right, What do you think are the greatest risks at just customer engagement, right? You look at the strength, 2 year performance in pro, 2 year performance in DIY, Overall engagement trends with the brand, what's the greatest risk that you sort of can look out to here?
Well, I think obviously the market ebbs and flows a bit based on the health of the consumer from a financial And I think we do kind of watch that pretty carefully. And I think we're coming off of a period of which the health have actually increased versus decrease. So I think we feel like we're nicely positioned. We also the other thing where we watch pretty carefully As I do think a couple of things that happened from a consumer trends perspective, and I think it is actually a little bit of a Kind of a wind in our sail here is I think first is consumers have decided more rapidly to adopt and engage with retailers who have an omni channel presence. So I think shopping online, using the website and using those tools have become very important to consumers.
And I think Those retailers who have invested heavily in those areas, I think will be advantage. We've been fortunate to be able to do that. And I think secondly, and this is true for both pro and for DIYers is I think you're seeing People consolidate trips as opposed to going to 3 or 4 specialty shops, you're seeing those trip consolidations into big boxes. So I think that's benefiting Not only us, but just Benefit Depot, you've seen this trend in Walmart, Costco and Target. I think these big box retailers are benefiting from that trip consolidation trend from a macro perspective.
It sort of feeds into another topic I always debate is, How do the independents do it, right? You think about the combination of labor and supply chain challenges that are out there today. Curious if you're seeing anything among the independent regional operators that would make you think that They may be struggling maybe directionally more with the challenges that are out there, anything on the competitive front as you think about what COVID has done to Those independent regional operators?
Yes. No, listen, I think those two trends are largely in our favor and big box favor. I think a couple of things that are happening, it's No news here, but obviously the supply chains globally are under pressure. I think those retailers who have big presence from a supply chain perspective and Our big volumes are advantage to be able to secure capacity and actually help mitigate and manage The cost increases that are happening in the space and I think us because we're the 4th largest importer of containers in the U. S, I think that's allowed us to do that.
If you're a small player in the marketplace, you're seeing probably greater cost increases and probably struggling to get capacity into the U. S. I think we've largely secured capacity for this year and for next year from a supply chain perspective, number 1. Number 2 is, I do think from a labor perspective, just having big presence and continue to grow from that perspective has allowed us to be very consistent in our labor across the country and I think we've fared pretty well as labor's Here in the U. S, some retailers have struggled there.
I think we were in pretty nice shape. And then finally is while we're not completely happy of our in stock levels. We feel if you look comparatively across the marketplace, we feel like we're better in stock than most of our competitors. So I feel like that's somewhat of an advantage for us at this point in time. And particularly, Stephen, with the small regional and local players, The in stock levels that I see when I've been out in the market has been pretty anemic.
Yes. It's a lot of challenges for those independents. So my family actually owns a building supply store as well. So I hear about it constantly. On that point, you think about sort of the performance spread that Lowe's has delivered historically versus industry growth.
The layering on of all these challenges and everything you just summarized, would it be fair to sort of assume that Lowe's performance spread should widen in the post COVID period? Do you think you'll outperform the industry and gain a more elevated level of market share looking out?
Yes. Listen, even without COVID, it was always our expectation when the new management team arrived at Lowe's in late 2018 is that we had a real opportunity to improve the performance such that we could outperform the market. I think COVID has probably increased our confidence in our ability to do that. So we truly believe that we will outperform the market. It has always been our expectation that we can't control the market.
We can maybe influence it a little bit, but that's somewhat outside of our control. But we need to control what we control and we can participate better more effectively in the market and take share over time. And you're seeing that obviously in 2021 and we think that pace and that trend should continue in the out years as well.
You mentioned the importance of omni channel, and I can't help but remember some of the challenges that Lowe's had with their e commerce offering in past years. So maybe can you just revisit and just summarize for us the state of Lowe's e commerce offering today and where we are sort of in the infrastructure optimization phase that the company sort of went on a couple of years ago?
Yes. Listen, I think we've dramatically improved our omni channel presence and here at Lowe's, I think the infrastructure moving to the Google Cloud is largely complete and it's incredibly stable. We're running now pretty consistently on a daily basis levels that back in 2018 when our website crashed, We were higher than that on a daily basis very consistently right now than back in just a few years ago. So I think it just shows the resilience that we baked into the system at this point in time. I think we've also really expanded our presence here such that It's not only can you buy online, ship to home, that's kind of basic.
Now it's like buy online, pick up in store, pick up at touchless lockers. We've really tried to meet the consumer how they want to be met and how they want to engage us. So a lot of work, both from a store perspective and a technology perspective to bring that to life and we feel like we're in a really good spot from that there. I do think you're going to see the next evolution of this as we think about moving to next day, same day even using gig networks and the like we think about that further evolution of our omni channel capabilities here.
And that would sort of be the potential next leg of e commerce penetration growth for the business or also just market share opportunities?
Certainly, an opportunity to expand market share from that in that vein. But at the same time, we just We still have a big opportunity to expand our assortment online. We're not even marketing online the assortment that we completely in our stores right now. So we have to do that. And then just think about the adjacent category opportunity above and beyond, call it An endless aisle, think about lighting as an example and fashion fixtures that you can't carry this complete assortment in the stores almost physically impossible.
But if you can extend that aisle via the omni channel presence, big opportunity, big unlock for us and we're continuing to push in those areas.
The DIY market, right, sort of a favorite topic for the industry and maybe just broader trends, right, as we think about a service economy and constant migration to do it for me in historical patterns. So curious if you could just rebase How you think about the DIY market as a whole in the post COVID environment? And how would you summarize the potential for behind the behavioral changes and the changes in wallet share allocation that you saw over the past 18 months?
Yes, listen, Steve, and I'll do it in context a little bit even with the Pro business to some degree. So I do think the DIY business still has an opportunity to continue to grow off this elevated level. It's probably going to grow more slowly than the pro business from a market perspective, because the Pro business as we understand it, one, we're not nearly as penetrated as we'd like to be, so it's a smaller piece of our business. And importantly, what we hear and see from our Pro customers is that, one, they're extremely busy today and they have a fairly expansive backlog. So That just tells us that the demand is sitting there is about to be fulfilled in 2021 and into 2022.
But having said that, even if you look at millennials who historically have not been in home ownership position, We've seen that category of individuals move into homeownership. And I think I had the, I guess the assumption that they'd be largely do it for me individuals and that hasn't really proved out as much as I thought. People have actually Millennials have gotten into kind of the DIY program as well. So I think there's increased demand in that category based on the evolution of the consumer there,
That's exciting. You look back at the various pro initiatives That the company has executed over the past couple of years. But curious if you could discuss if there were any specific investments that really were the point for the business or really were most impactful. Any sort of high level thoughts there would be helpful as we frame the pro opportunity?
Yes. So, Stephen, first, we had to get the base business, the business model correct. I mean, we had a really poor service offering in Pro back in 2018. We were out of stock. We had poor service on that end of the floor.
We didn't have the right So what we've done is we've actually dedicated additional staff in that area. We leaned into job lot quantities. We fixed the assortment. Last year, we moved the adjacencies within the Pro categories around pretty dramatically to make it easier for that Pro customer to shop our stores. So largely, we've got the foundation fixed at this point in time from a service perspective.
Now, the next evolution of this is layering on top of that is a CRM tool to help us really know the pro customer and lean into that pro customer. And secondly, a tightly put together comprehensive loyalty program that we think over time will drive repeat visits and an additional share of wallet of those existing customers. And so we're excited about the next evolution of the pro business and that's where you should see us lean into as we cycle into 2022 to gain additional share in that really important segment of our business.
And are you already seeing an increase in average pro Spend trends and just also engagement with the brand because it was a fact in past years, I think that you provided I just wallet share stats of the Pro. And it certainly seemed like there was tremendous opportunity ahead. So where are we in the evolution of just share capture of Your core pro base?
Yes, Steve. We feel good about where we are and we are seeing expansion based on the data sets We have I think what's really important for us is we will be able to once we get our CRM tool we ingest it and out in the marketplace, we start getting that data populated. We can we will be able to more specifically see over time how that is evolving in our business and really be able to go back and see if they're share a wallet like importantly, where they're leaning into us and how they're using us. But importantly, where they might not be, so that we can make that pivot and make sure that we get them into our channel in those other categories. And so I think more to come on that, Stephen, as we build out that model and we really use our loyalty platform to drive further engagement and share gains with that segment.
System improvements has also been a huge initiative, right, for Lowe's Over the past couple of years, and benefit capture, right, has transpired accordingly. So curious if you could provide an update on what phase the company is in regards to just implementation of new systems. And then one of the ones that we're sort of focused on is that local market and dynamic pricing capability strategy as we think about just Planning inventory and allocations?
Great. Let me take them in a couple of different buckets, if you will. I'll start 1st, maybe with systems productivity in the store. I think what we've done, we've done a really nice job of rolling out a series of technologies to enable us to reduce the amount of tasks that are happening in our store and then taking some of those hours that were dedicated to that to the bottom line and taking some of those hours and reinvesting them in service. And that's allowed us to really become more productive at the same time and improve our service levels.
We probably have another at least 2 to 3 years of initiatives that we've that will continue to allow us to drive and improve our productivity in the store. So well on our way there, more work to come, really nice pathway. On the pricing side of the house, I would say that we brought our pricing in our ecosystem from a cost management perspective and a pricing perspective. I'll say the industry standards. We've if you remember, Stephen, back in 2019 and early, We had a gross margin miss.
I think we largely didn't have the ecosystem built to be able to be effective in there. I think we've largely got we have that solved. Now what we're trying to do is really evolve that to be even more dynamic and being more market specific. And so that's probably on our roadmap for 2022. So we probably have another year of work at least to get that ecosystem, what I would say at world class, once we get past that.
So we feel like we're doing really well. We have a good system. Have a good process, we're managing it effectively. We can unlock additional value as we get to the next evolution of it. And then I'll just close a little bit, Stephen, on this topic around systems that support our supply chain.
As you know, we're going through a fairly dynamic and dramatic evolution of our supply chain, making it more market based for big and bulky items. Part of that is an overlay of systems that allow us to have greater inventory visibility, both in the store, but up through the different layers of our supply chain. And I would say we're probably still pretty early stages in some of that those technologies. So that's another unlock that will come about as we roll this out really over the next 24 months or so.
Yes, that's sort of a perfect transition into the next topic for us, which is the market delivery transformation initiative. Maybe just to start high level, if you could summarize for the listeners here of the real goal behind the strategy, Any initial learnings from Florida to help us better understand or frame the potential implications of a national rollout?
Yes, sure. So what we're trying to do here, the ultimate objective here is, we think we can enhance our sales of big and bulky items. We think we can improve the efficiency of our delivery, I. E, do it in a way that's economically better than what we're doing it today. And 3rd, free up working capital from a company perspective so that we can leverage our inventory more effectively.
And then finally, have a better service model because we'll be able to from a technology perspective, help the consumer see that delivery from initiation to completion. And today that ecosystem is not completely built out. So we have a big opportunity here. If you look today in our legacy Lowe's stores, each store is almost its own independent entity. It can't see what's happening with other stores around it.
And they essentially carry, in this case appliances, a full assortment of appliances in their back Rome. And so they sell out of the back room basically. What we're trying to do is take those appliances out of the back room, move them one node up in the supply chain. So we can now we can have a cross dock facility service multiple stores within a geographic region and the selling associate can then sell out of that node and actually into the bulk delivery node as well. So it frees up additional inventory that's available for them to sell.
And now we can plan that delivery much more effectively for the entire market versus each independent store. So that will essentially free up a lot of labor in the stores. They don't now don't have to manage that inventory. So it will reduce our cost, but we will push a little cost up into the node of the supply chain. So that will dampen our gross margin.
The net effect of that is the flow through economically, the operating income line is very favorable. So that's the playbook we're running, Stephen. We have this up and running in Florida. We recently rolled it out to a second market. We'll have it to a third market by the end of this year.
And we anticipate that we'd have this fully rolled out in roughly 24 months after the end of this year, somewhere in that ballpark, Steve.
Yes, it's an interesting topic, right, because it almost feels Like we're entering an investment cycle, but the efficiency capture that you're seeing in the stores, it almost From what I'm hearing, it almost has the potential to neutralize or even drive a net accretive benefit to EBIT margin?
It will, Stephen. The challenge like when you open up a new store, the first periods of time, you don't run at full capacity. So there's Until you get up the curve from a capacity perspective, it's almost like running 2 parallel systems within our infrastructure. But once it gets mature within probably 6, 8 months, then you start relieving yourself of that those pressures.
One of the last topics, right, input operating cost pressures, seems like there's a lot in retail today, especially around freight and labor costs. So curious if you could just briefly touch on how both cost pressures, labor, freight and maybe supply chain are progressing relative to expectations and how Lowe's is managing and or mitigating through this rising cost environment?
Yes. Certainly seeing some pressure there, Stephen. I would say that the pressure that we're seeing largely consistent with what we Expected to see when we came out of Q2. So no surprises there. I think the good news from a labor perspective, we are seeing a little, I'll say hourly wage pressure, but we've been able to largely offset that through improved productivity in our stores, the effect of that has not really waned on the company.
I do think too is that we have always been kind of a high wage here in the marketplace. So we've always been close to the top to start with. So we feel like while we're feeling some pressure has been somewhat muted because of where we are positioned in the retail sector. I do think too is or what we're seeing now is our labor demands go up in the first half the year due to spring, but they kind of come down in the second half of the year. So you're seeing a lot of companies struggle to get labor right now because they're trying to ramp up holidays, that's not a big event for us.
We're actually, if anything, ramping down a little bit for the back half. So I think we're kind of a little bit off cycle to some of those demands. So we've been able to manage that pretty effectively. And to your point, there's no surprise Topic of the day has been supply global supply chain and capacity and costs in that space. And I think we are seeing cost pressures there as we expected and as we planned.
I think the company is doing a nice job of helping manage that Given our scale and our breadth in that area, we feel good again about where we're positioned for 2021 as far as products that we have for our stores. But I think also we feel good that we've at least from a product perspective locked up capacity for next year. So we feel that we've managed ourselves in a nice spot to be able to support the product needs for the company in 2022. We will see pressure from a price perspective and we'll manage ourselves through that.
Well, I think that's a perfect time to end And a perfect topic to end on as well. So Dave, thank you for the time today. Really enjoyed the conversation and thank you for everyone for listening in.
Yes, Stephen, thank you for hosting us. I appreciate the interest in the company. Take care.